Editor’s Note: Fight The Fear

The stock market fell 9 per cent between March 2 and 24, and usually such a huge fall pushes investors, new and experienced alike, into indecisiveness and panic. That is what seems to have happened even this time.

A colleague, who is a long-time investor in mutual funds, called me on the day the Iran war broke out. Pat came the most common question: “Should I stop my systematic investment plans (SIPs) of mutual funds?” I asked him a counter-question: “Do you need the money anytime soon?” He didn’t. When I told him that he should continue them and even take the opportunity to top up, he invested a lump sum when the Sensex was still above 80,000 (it eventually touched a low of 72,696 points on March 23). Usually, during such prolonged periods of uncertainty, it is better to deploy any lump sum you have gradually, and not in one go.

Interestingly, another friend, who has ventured into equity investing in the last couple of years, had the same question. “My entire stock portfolio is colour-coded red. It’s scary. Should I stop my SIPs?” My response was more or less the same, but I had a long chat with her to assuage her fears. Her reaction was: sitting tight on existing SIPs, but still investing only minimally “because it’s scary.”

The conversation I had with another friend, who recently got a promotion and raise and has a daughter, almost made me jump out of my seat. During general chit-chat, I asked him if he was using the market dip as an opportunity for his long-term goal of his daughter’s education 10 years later. His response: “Markets are so volatile, I don’t want to go near them. I can’t handle it. It doesn’t let me withdraw in the short term. I am more comfortable with fixed deposits (FDs), which you can liquidate anytime.”

Investors with a conservative investment approach cannot be written off because it is about personal choices and comfort and it’s good to have clarity about it. However, my friend’s approach is faulty on several counts. One, since he is so hung up on safety, he is not even considering asset allocation, which can give a growth kicker to his portfolio, while accommodating his conservative risk appetite. Two, he is relying only on one fixed-income instrument, which means he is not diversifying even within the category when there are liquid options, such as debt mutual funds. Three, he is not considering the tax angle in products like FDs, which are unable to give inflation-beating returns. Four, his choice of investment doesn’t align with his goal, which could put his daughter’s future in grave danger, at least financially. To my mind, he needs to consult a financial planner immediately, and I told him that.

The common thread in all these conversations was: deep market corrections instil fear, driving investors towards decisions that are hasty, could put portfolios in jeopardy, or give sub-par results.

In such times, it is important to fight the fear and brace yourself. Find strength in the fact that market falls have reversed historically. At least find the courage to simply do nothing—don’t withdraw, don’t stop your SIPs and don’t even invest extra if that doesn’t make you comfortable. If you do believe in the economy and markets and have enough cash flow, use the market correction to rebalance the asset allocation in your portfolio. Add to equity, which would have eroded during the correction. If you feel you are unable to handle the stress, but still want to build a portfolio that can fulfil your goals, seek professional guidance, now.